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Types of Related Trusts
Staff Writers
A trust can be established to insure that funds are available for a disabled child’s lifestyle. If funds are left directly to a physician’s child at the age of majority, Medicaid is lost until their funds are spent down. The type of trust chosen is therefore critical.
Medicaid, Payback or OBRA 93 Trust:
First authorized by the Omnibus Budget Resolution Act of 1993, allows the trust for pay for non-essentials. The specific language must be written in to the exact letter. Upon the death of the child the Medicaid bill is repaid from the funds remaining in the trust, and thus the Medicaid and SSI benefits continue to be available to the child during her lifetime. The payback trust is more advantageous when established at an early age. The funds in the trust can then be stretched out to last over an extended period, hopefully the child’s lifetime. Here are two examples where such a trust is an effective vehicle.
In the first case, a payback trust is set up for a 21-year-old with $100,000. During his lifetime the Trust spends $92,000. The Medicaid bill is $75,000. Medicaid receives the remaining $8,000 and the bill is considered paid in full.
In the second case, a payback trust of $350,000 is set up for a 35-year-old. Upon the child’s death, the trust has assets of $225,000 and the Medicaid costs due are $75,000. The trust then meets its Medicaid obligation and the remaining $150,000 is available for other beneficiaries.
Other effective trust vehicles include a community trust, master trust and special needs trust, each with its own set of rules.
Community Trust:
This trust is managed by a community foundation of volunteer trustees so the issue of dealing with trustee death is erased. This trust vehicle greatly expands the window of opportunity to those who may not have the time, expertise or funds to establish a private trust, to receive the benefits of a trust.
Master Trust:
May be established by a community or by an organization and is administered along the lines of a Community trust.
Special Needs Trust:
This trust may maintain Medicaid and Social Security benefits, without having the payback clause. Unfortunately, this trust is sometimes challenged as it entails more risk than a payback trust and must be considered carefully before selection.
For example, a situation where this may be put in place is when gifting by family members is used to support the specialized schooling of a disabled child.
The Crummey Trust:
Trust named after the D. Clifford Crummey family who first set it up to deny the annual gift tax exclusion. A Crummey Trust does not give the child any right to income but does give the right to withdraw the amount of each gift up to 30 days after it is made. Since the withdrawal right begins immediately after the gift is made, it is considered a present interest. If the child does not withdraw the gift within the 30 days, the withdrawal right lapses and the money remains in the trust until the child attains a designated distribution age.
Of course, parents must still convince the child not to withdraw. However, if the child decides to withdraw, s/he can only access the amount of the most recent gift; not the entire trust. Thereafter, parents can eliminate all future withdrawal opportunities by not making any more gifts. The property in the trust remains intact and grows until distributed. This private trust option and its language must be specific to avoid disqualification.
The Charitable Remainder Trust:
This is an irrevocable trust with the beneficiary enjoying the trust funds and the charity receiving the remainder upon death. The tax exempt status of a CRT may make the funds in the trust last longer. If the charity is a nonprofit organization involved in the caring of special needs children, the physician’s family can show gratitude with a CRT.
The Irrevocable Life Insurance Trust:
An ILIT may be used in tandem with the various trust vehicles to assure continued funding for the child after one or both parents have died.
Which of the above trust types have you used and what were the results?
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